It’s your money

Take care with preferred shares

These days, farming operations are often complex businesses that require careful planning. Gone are the days of a simple family farm that provides both an income and a home.

Many farms have become corporations, where land, equipment, crops and animals are rolled into a business. The reason why is easy—deferring taxes to better manage cash flow and helping minimize taxation on the bottom line. Often, the corporation uses preferred shares to pay out dividends that qualify for tax credits.

However, this system requires careful planning over years to ensure that when you’re ready to cash out and sell, you’re not dinged with a massive tax bill. You must redeem shares over a significant period of time to ensure you’re getting the tax benefits now while planning for the future.

I have seen farming operations hit with massive tax bills where the farm doesn’t have the cash to pay. Don’t get caught in this situation. The sooner you get started, the better. A young farmer with 30 years to redeem shares has many more years than someone with 10 years to go before they retire. Make sure you’re planning with your tax professional now to prevent any issues down the road.

Preferred shares in Canada are securities issued by corporations that pay dividends that qualify for dividend tax credits. The shares are “preferred” because the dividends must be paid preferentially before any dividends are paid on the corporation's common shares.